FCC moves to redirect phone subsidies to broadband

The U.S. Federal Communications Commission took a major step Tuesday toward ending subsidies for traditional telephone service in rural areas and redirecting the money to broadband deployment.

The FCC's proposal to overhaul its Universal Service Fund (USF) could eventually lead to new fees for broadband users, with the agency potentially shifting fees now paid by long-distance voice customers. But the FCC's notice of proposed rulemaking, unanimously approved by commissioners, doesn't tackle the issue of how to support the fund. Proposals on the fee structure are likely in the coming months, FCC staffers said.

The FCC proposal would make major changes to USF, a 14-year-old program that many critics have called outdated and wasteful. The proposal, for which the FCC will seek public comments early this year, would phase out subsidies for rural telephone service in the USF's US$4.3-billion-a-year high-cost fund, with funding redirected to help deploy broadband to the estimated 24 million U.S. residents who don't have wired or wireless service.

U.S. lawmakers and some FCC members have been calling for changes to USF for years, saying its focus on traditional telephone service is outdated. In addition, USF is inefficient, because it pays for as many as four telecom carriers to provide service to some areas, and it pays up to $20,000 a year to support single telephone lines in some cases, FCC Chairman Julius Genachowski said.

"The Universal Service Fund is broken," Genachowski said during Tuesday's FCC meeting.

The proposal would cap subsidies for a single phone line in the continental U.S. at $3,000, and it would end funding for multiple carriers to provide voice service in the same area. The agency would use cost savings from those reforms and other efforts to start a Connect America Fund focused on subsidizing broadband service to areas that don't now have it.

In addition, the proposal looks for ways to control the growth of the USF, which includes programs for subsidizing telephone service for poor people and connecting schools and libraries to the Internet, as well as the high-cost fund. USF's annual budget has grown from $4.9 billion in 2000 to $8 billion now, said Robert McDowell, a Republican member of the FCC.

USF is funded through a fee of more than 15 percent on long-distance telephone bills, but many U.S. voice customers are abandoning traditional long-distance service for mobile phones or VoIP (voice over Internet Protocol). The growth in USF is "simply unsustainable," McDowell said.

McDowell complained that the Democratic majority's proposal doesn't include plans to revamp the fee structure for USF. "While not ideal, in my view, piecemeal reform is better than no reform at all," he said.

It doesn't make sense for traditional telephone customers to pay the entire cost of USF when the fund is shifting to broadband, added Michael Copps, a Democratic member of the FCC.

"Recognizing that consumers ultimately bear the burden, equity would suggest that a fund that distributes support for broadband ought to require those same services to contribute," Copps said. The high-cost fund's current budget is "unlikely to be the total bill for bringing total, high-speed telecommunications to every citizen in every corner of the land," he added.

The proposal would also revamp the FCC's intercarrier compensation system, the complicated set of rules allowing telecom carriers to charge for carrying each other's traffic. The proposal would gradually reduce the per-minute charges that carriers bill each other, while providing for some money to offset intercarrier compensation losses to some small telecom providers.

The FCC's proposal looks for ways to discourage so-called traffic pumping, a controversial practice in which some small carriers with high intercarrier access fees partner with sex chat lines or free teleconferencing services to drive voice traffic to their networks. The proposal also seeks to eliminate so-called phantom traffic, a practice in which some carriers disguise voice traffic as a way to avoid paying high intercarrier fees.

Several telecom and tech groups have praised the FCC's efforts to revamp USF.

"We applaud the FCC for moving forward on the important task of reforming the Universal Service Fund, especially the bloated high-cost fund that sometimes provides government subsidies in communities that already enjoy robust competition," Kyle McSlarrow, president and CEO of the National Cable and Telecommunications Association, said in a statement. "Restructuring the Universal Service Fund so it promotes broadband deployment in truly unserved communities is critical to accomplishing the national priority of connecting all Americans."

Grant Gross covers technology and telecom policy in the U.S. government for The IDG News Service. Follow Grant on Twitter at GrantGross. Grant's e-mail address is grant_gross@idg.com.

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